The iPhone May Prove a Costly Prize for Verizon

Nearly four years of pent-up demand by users who wanted a Verizon iPhone means Verizon is bound to sell millions of the devices. That success may not exactly be a good thing for Verizon, at least short-term: the subsidies involved may be so high as to cut significantly into Verizon's profits.

According to a Bloomberg report, Verizon may spend as much as $3 billion to $5 billion the first year it has the iPhone, in subsidies. Carriers pay subsidies to device manufacturers to reduce the cost of devices to consumers, which is why they ask consumers to sign up for service contracts. Consumers who choose to buy phones without a contract see the "true cost" of the device.

While the company will make that back from the service contracts folks will have to sign up for, it will take some time for that to happen. In fact, James Ratcliffe, an analyst at Barclays Plc in New York, estimates Verizon will sell at least 9 million iPhones this year. He assumes a subsidy of about $350, which would mean Verizon would pay $3.2 billion in subsidies this year.

Meanwhile, John Hodulik, an analyst at UBS AG. Hodulik said Verizon may sell as much as 13 million iPhones. He estimates a $400 subsidy, which would come to a total of $5.2 billion.

Hodiluk believes that Verizon will add 2.1 million new subscribers this year, surpassing its largest rival, AT&T for the first time since 2008 (which, coincidentally, was the year the iPhone 3G went on sale). AT&T is estimated to only add 650,000 subscribers in 2011.

It takes AT&T about six months to make back the cost of the iPhone from customers’ data plans, iSuppli’s senior analyst for wireless communications, Tina Teng told Bloomberg. Given that Verizon will most likely pay the same price as AT&T for the smartphone, Verizon's profits for the first two quarters should be most affected.

Holulik believes the first-year loss will reduce earnings-per-share from Verizon from $2.26 last year to $2.20 in 2011.